Sunday, November 02, 2008

Not the Fault of Deregulation

There is a growing effort from those on the left to blame our current economic problems on "deregulation."

According to leading Democrats:

House Banking Committee Chairman Barney Frank: "This is the fruit of decades of 'leave the market alone, don’t regulate it. It will take care of itself' ... Clearly we’ve got to get some regulation here."

House Speaker Nancy Pelosi: "The Bush Administration’s eight long years of failed deregulation policies"

House Democratic Leader Steny Hoyer: "A stark failure of the economy and this administration’s laissez faire, take the referee off the field, let anyone do whatever they want to do and everything will be fine"

As the Heritage Foundation puts it though, "The problem with the Democrats' 'deregulation did it' meme is that it didn’t happen – deregulation that is."

Although nowhere near being a socialist "command economy", the United States economy is quite heavily regulated, and a lot of new regulations have been put into place under the Bush administration, like Sarbanes Oxley.

Which is not to say that Bush has deregulated some things, but even far-left Democratic senators like Chuck Schumer have been pro-deregulation in recent times.

Furthermore, government interference with the economy shares a large share of the blame for the mess we are in.

I've stumbled across a number of solid articles that correct the record on this dubious "deregulation caused this" claim, which I think are worth sharing:

First, an editorial titled Is Capitalism Dead? explains the (well intentioned) role the government played in ultimately bringing down the housing market. It begins:

Is this the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush's ideology. But this is wrong in two ways. The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.

A Union-Tribute editorial expands on this, beginning with "The mismanagement of Fannie Mae and Freddie Mac is no orphan. It has many fathers, and deregulation of financial markets isn't one of them." and concluding "Appallingly, some Democrats still claim that deregulation fomented by Republicans and greedy investors caused the meltdown. Never mind that the policy of spreading homeownership around to folks who couldn't afford it will cost millions their homes and taxpayers an extra $700 billion."

Finally, I think Don Bourdeaux makes the case extremely well in a letter he sent to the Washington Times:

Your equating George W. Bush with FDR is spot-on ("Franklin Delano Bush," October 20). Both presidents recklessly increased government's role in the economy - a move that proved (in FDR's case) and will prove (in Bush's case) to do nothing but saturate the economy with such uncertainty as to frighten away entrepreneurs and investors.

But popular history will almost surely remember Bush, not as a second FDR, but as a second Herbert Hoover. The myth will be made that Bush was a staunch free-marketeer who was succeeded in the Oval Office by a charismatic saint whose hyperactive interventions saved the economy (even though precious little evidence of economic salvation will appear in the data). History will forget Bush's interventions just as it has forgotten Hoover's - as it has forgotten that Hoover signed the largest tariff hike in U.S. history; as it has forgotten that Hoover tried to create jobs by deporting hundreds of thousands of Mexicans; as it has forgotten that Hoover signed the Emergency Relief and Construction Act, the Federal Home Loan Bank Act, and created the Reconstruction Finance Corporation; as it has forgotten that, with the Revenue Act of 1932, Hoover raised the top marginal tax rate on personal incomes from 25 percent to 63 percent (in addition to raising the corporate-tax rate).

History will repeat itself, blaming capitalism for a problem caused and intensified by government interventions.

Update: Amity Shlaes responds to a critic, and expands on the forgotten history mentioned by Don Boudreaux.

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